After a year that featured tech stocks as the big winner,
many investors (and television talking heads) have expressed shock that the
energy sector leads the way so far in 2021. With the price of crude oil rising
higher, the Energy Select Sector SPDR ETF (XLE) has gained 43% through
the first five months of 2021. However, dont worry that you have missed out on
all the energy gains. I suspect that by the end of 2021, the sector will have
doubled its gains from the first half of the year.
The price of crude oil drives energy sector stock prices. After
trading around $40 through the second half of 2020, west Texas intermediate crude
oil (WTI) now goes for $68 per barrel, and the uptrend will continue. It looks
like WTI will hold $75 to $80 per barrel in the second half of 2021.
Energy sector stocks should put up some significant gains
when they release second-quarter results. (Remember that earnings results are
always about four months behind.) If WTI oil stays above $70, we should see a
repeat of outstanding financial results in late October.
Outside of the mega-cap energy stocks, most companies in the
energy sector focus on one of the three subsectors.
Energy upstream covers those companies drilling wells to
produce oil and natural gas. This sector will profit the most from higher oil
(and natural gas) prices. Upstream companies face the challenge of a steady
production depletion from existing wells, so there is a constant need to invest
in new drilling to maintain and grow production levels. Low energy prices can
be devastating to the upstream sector. Fortunately, that will not be the case
Energy midstream includes the pipeline companies. Midstream
services include gathering and processing in the upstream areas, as well as
providing transport (pipelines, railcars, etc.) between producers and users,
storage facilities, and terminals. Midstream companies have stable, fee-based
revenue streams and are more valued as income investments. You can find plenty
of high single-digit yields from solid companies in this sector. However, a
rising energy sector will likely pull up midstream share prices, too.
Refining companies make up the bulk of downstream energy
stocks. These companies refine crude oil into the full range of fuels we use,
including gasoline, diesel fuel, and jet fuel. I find this part of the process to
be very interesting because the refiners control neither the input costs (crude
oil) nor the output prices (fuels). Those prices are set in the financial
trading pits. This situation means refiners must be highly efficient to stay
profitable when crack spreads are tight. It can also be very, very profitable
when the spread widens out. Refining stock prices tend to be cyclical, but I
think this phase of rising energy prices will lift all sectors.
As you can see, it takes some research to invest in the
right sectors of energy, based on your investment goals. Here is one stock I
recommend to my subscribers that should do very well for the remainder of 2021:
Devon Energy Corp.
(DVN) recently instituted a dividend policy in which half of each quarters
profits will be paid out as common stock dividends. This stock will benefit
from the ongoing energy bull market and some very hefty dividend payments over
the next several quarters.
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